Burger King Worldwide Inc. is looking north to expand, launching acquisition talks with Canadian coffee-and-doughnut chain Tim Hortons Inc. and rekindling the political debate over offshore tax shifting.
Stock in both companies soared Monday after they confirmed the discussions, which could create the world’s third-largest fast-food chain. Burger King shares jumped $5.29, or 19.5%, to $32.40. Tim Hortons shares rose $11.88, or 18.9%, to $74.72.
Any deal to set up headquarters in Canada would represent one of the largest and highest-profile transactions to involve so-called tax inversions, in which a U.S. company buys a foreign firm and moves its headquarters to a lower-tax country.
Although Burger King would reap sizable tax savings, analysts said there is more to the deal than that. Burger King needs Tim Hortons to compete better with rivals McDonald’s and Starbucks, especially in the booming breakfast arena.
“Burger King really has very few breakfast sales,” said Andy Brennan, lead analyst at IBISWorld. “Breakfast is contributing most of the growth in the industry at the moment. That is why they are jumping in with Tim Hortons.”
That growth has prompted fast-food chains such as Taco Bell to offer new breakfast items, including a Waffle Taco, and pushed Dunkin’ Donuts to expand aggressively in California.
Burger King lags behind McDonald’s, which has long dominated quick-serve breakfast with its Egg McMuffin and, more recently, its McCafe coffee. Burger King’s partnership with Seattle’s Best Coffee has failed to lure many morning customers, analysts said.
Buying Tim Hortons would give Burger King control over a brand long linked to coffee and breakfast.
“In Canada, when people think breakfast, they think Tim Hortons,” Brennan said.
The companies said Burger King and Tim Hortons would continue to operate as stand-alone brands if a deal is completed.
“Tim Hortons and Burger King each have strong franchise networks and iconic brands that are loved by their respective consumers,” the companies said in a joint statement.
A deal would be the latest in a recent surge in inversions that has led to a push by the Obama administration and some Democrats in Congress to place new limits on the maneuver.
The talks between Burger King and Tim Hortons “keeps the fires burning on the issue” as lawmakers prepare to return from their summer recess, said Chris Krueger, a Washington policy analyst at financial services firm Guggenheim Securities.
A foreign-based company does not have to pay U.S. taxes on its earnings from the rest of the world. It also could use some internal maneuvers, such as loans between foreign and U.S. subsidiaries that generate interest deductions, to further lower how much it pays to Washington each year.
So far, inversion deals have been focused in the pharmaceutical industry. A possible deal involving a well-known consumer brand like Burger King could add to the pressure on Congress to enact new limits on inversions.
“If this merger goes through, there could well be a strong public reaction against Burger King that could more than offset any tax benefit it receives from a tax-avoidance move,” Sen. Carl Levin (D-Mich.) said.
Burger King is based in Miami and its earnings are subject to the 35% federal corporate tax rate in the U.S., the highest among developed nations. Tim Hortons is based in Ontario, Canada, where the federal corporate tax rate is 15%.
Like many countries, Canada has lowered its rate in recent years to be more business-friendly.
But combined with local and state taxes, Canada’s overall corporate tax rate is 26.3%, according to the Organisation for Economic Cooperation and Development. The combined U.S. corporate rate is 39.1%.
Many U.S. companies use tax maneuvers, including sheltering some foreign earnings abroad, to pay less than the full rate.
Burger King’s overall effective tax rate in 2013 was 27.5%, according to its annual report. Tim Hortons’ effective tax rate in 2013 was only slightly better at 26.8%.
In his budget for the next fiscal year, President Obama proposed toughening inversion rules by requiring a company to have at least 50% foreign ownership, instead of the current 20%, to be considered foreign for U.S. tax purposes.
In July, Treasury Secretary Jacob J. Lew urged congressional tax writers to act quickly to limit inversions. He called on U.S. companies to have a sense of “economic patriotism” and to try to pay their fair share of taxes.
House and Senate bills have been introduced based on Obama’s proposal. A House bill, sponsored by Rep. Sander M. Levin (D-Mich.), would generate an additional $19.5 billion in tax revenue over the next 10 years by making inversions more difficult.
But a deal between Burger King and Tim Hortons still might be allowed under such legislation.
The companies are similar in size — Burger King’s market value is $11.4 billion while Tim Hortons’ is $10 billion. And Levin’s bill has an exception if a company has “substantial business activities,” such as 25% of its employees or assets, in the country where it is headquartered.
In their statement, Burger King and Tim Hortons said a new company “would be headquartered in Canada, the largest market of the combined company.”
Burger King has more than 13,000 locations in 98 countries. Tim Hortons has 4,546 restaurants, with 3,630 in Canada. It has 866 U.S. locations.
Democrats and Republicans would prefer to address inversions as part of a broader overhaul of the U.S. tax system that would lower the corporate rate by eliminating some tax breaks.
But with tax reform stalled and more inversions taking place, Democrats are pushing for stand-alone legislation. The Obama administration also is considering whether it can take executive action.
Companies are growing tired of waiting for Congress to overhaul the tax code, so they’re looking for inversion deals, said Tim Larson, who heads tax and business services at Marcum, a national accounting and consulting firm.
“Burger King and Tim Hortons, it’s a good fit,” he said. “I’m sure there are some synergies there, and to be able to wrap a tax strategy around that, it’s a sweeter deal.”
Puzzanghera reported from Washington and Li from Los Angeles.